BEIJING—As sales in the world’s largest auto market has downshifted, some of China’s leading car companies are facing declining profits and soured investor sentiment.

On Monday,
Brilliance China Automotive Holdings Ltd.
BCAUY 1.13%
, a partner of
BMW AG
BMW -1.01%
, forecast a 40% drop in profit for the first half of this year as its joint venture with the German luxury-car maker contended with higher selling costs. Also, shares of
Great Wall Motor Co.
GWLLY -0.33%
, a mainland maker of crossover vehicles, plunged 13% on Monday after its Friday announcement of a share offering valued at $2.7 billion to fund increased production.

Brilliance’s Hong Kong-listed shares were down 7.4% around midday Tuesday, after dropping 0.7% Monday. That compared with a 0.3% decline in the broader market around midday Tuesday. Great Wall shares were down 2.9% in Hong Kong.

The moves came after China said Friday that its car market registered the first year-over-year decline in June in more than two years. Sales of new cars fell 3.4% from a year earlier—only the third monthly decline since September 2012.

Unlike the previous two monthly falls—which were fueled by a weeklong holiday in 2013 or political tensions with Japan that spilled over into sales of Japanese cars in 2012—the latest skid comes amid broader warning signs: The country’s economy is slowing, its stock markets are falling and the risk of overcapacity in production is increasing.

The slowdown has presented a challenge to the car makers that have reaped years of solid growth from China.

In January, BMW agreed to offer about 5.1 billion yuan, or roughly US$821 million, in subsidies to its Chinese dealers to cover part of their losses last year. Sales for BMW cars have remained tepid amid a cooling economy. BMW reported a disappointing 2.5% year-over-year gain in its China sales in the first half of this year, compared with the 4.8% increase in the overall Chinese car market. BMW’s China sales rose 23% in the year-earlier period.

Some BMW dealers said the German car maker has ramped up its incentive programs to entice dealers. For example, they said BMW agreed to offer dealers who completed 85% of the second-quarter sales targets a subsidy of as much as 18,000 yuan per car.

“In the past, we should complete at least 110% of the sales targets to get the subsidies,” said a BMW dealer in China. Another BMW dealer, who also confirmed the incentives, said the recent market volatility has added uncertainties for sales. “Some customers gave up their orders after suffering huge losses from their stock investment,” he said.

BMW China declined to comment on the profit decline in its partner. A spokesman for BMW said the company has adjusted its incentive policy for dealers to respond to the slowing demand, but he didn’t give specific details.

In a written statement filed with the Hong Kong stock exchange over the weekend, Great Wall said it would sell as many as 387 million yuan-denominated shares at no less than 43.41 yuan (US$6.99) each to as many as 10 investors in China. The share offer represents about 13% of the company’s issued share capital.

Great Wall said it would use the proceeds to boost its production capacity and fund research and development of alternative-energy cars. Still, concerns about the company’s prospects amid an industrywide slowdown and intense competition sent its stock down 13% in Hong Kong to 32.95 Hong Kong dollars, or US$4.25.

“Great Wall has also responded to the slowing demand and the more aggressive pricing strategy from its competitors by offering price cuts for select models. This likely will impact its gross margins and earnings,” said a Nomura analyst,
Benjamin Lo.

While demand for sport-utility vehicles has been strong in recent years thanks to Chinese consumers’ preference for spaciousness, height on the road and off-road capabilities, the sector is also slowing, along with the broader market.

Government data show that sales of SUVs in China rose 38% in June, compared with annual growth rates averaging 49% over the past five years. Also, foreign and Chinese auto makers are adding more SUV models to their lineups at lower price points, which has intensified competition and is likely to affect the companies’ profit margins.

Last month, Great Wall announced a 5% price cut for models including the Haval H2 and H6, following similar moves by foreign and domestic competitors such as
Volkswagen AG
,
General Motors Co.
and
SAIC Motor Corp.

Mr. Lo at Nomura chopped the target price for Great Wall by 35% to HK$42.70.